Just A Quick Note on GDP Revisions

The downward revision was driven primarily by a faster shrinking government sector than originally estimated.

The decline in government spending now essentially matches the rise in personal consumption spending. Thus right now, all of the growth in the economy is coming from business investment.

I think the later point is important because few people seem to be able to internalize that business investment has been quite strong during this recession and indeed right now is the entire recovery, what recovery there is.

That being said, that can only go on for so long. The economy needs durables and residential investment to recover. That means cars and homes. The cars may be looking up and I am still waiting for more homebuilding but they do not seem imminent.

It is good to analyse different components of GDP but unfortunately the article is not factually correct as it takes much too short a time frame. Business investment has not been relatively strong during the recession – on the contrary consumption has been stronger.

If the period since the beginning of the recession in the 4th quarter of 2007 is taken then, in constant price 2005 dollars, non-residential fixed investment has fallen by $181 billion, residential investment by $200 billion, while personal consumption has risen by $74 billion and government consumption by $53 billion. GDP itself remains $66 billion below its 4th quarter 2007 peak. In short the entire decline in GDP is accounted for by the fall in fixed investment while consumption has held up.

An analysis of the 1st estimate of GDP, which is not fundamentally different, can be found here http://bit.ly/nCgmaT